Owning a business is difficult, and when you throw a 70,000-page tax code on top of that, it can become even more challenging. To help companies grow, many owners are investing in tax lawyers to help them decrease their business tax obligations. Without this complex subject on their plate, they are free to find creative ways to grow their company. To understand how to decrease your tax obligations, you first have to know what they are.
Federal & State Obligations
Small business owners must pay a self-employment tax. If you have one or more employees, you will need to withhold federal income tax from their wages. You might also be subject to Medicare and Social Security taxes filed under the Federal Insurance Contributions Act (FICA). If you hire independent contractors, you need to report contract payments annually, which must be sent to the contractor and the IRS.
Partnerships and multi-member LLCs generally don’t pay federal taxes at the entity level. Instead, they file their returns that show the business’s income, deductions, and other information. Along with that, they must disclose the names and addresses of each partner with each member’s distributive share of taxable income.
At the state level, business most report new hires and take care of workers’ compensation and unemployment insurance.
Tips on Lowering Your Tax Obligations
Now that we know some of the obligations a business faces, we can start finding ways to help decrease the amount you legally need to pay. Let’s jump into some of the different things we can help you identify:
Review Your Tax Elections
You are allowed to deduct the cost of acquiring equipment in full up to $1 million. However, if you are just starting your business, it could be more beneficial to spread the value of the purchases over future tax years. This can help you in future years when assets might be more valuable to your company.
Deducting Required Business Insurance
Insuring your business is essential, but some types may be deducted. For instance, liability, workers’ compensation, commercial auto, and business interruption service insurances may all be deducted.
Offering Fringe Benefits For Your Employees
Offering benefits not only makes your company more attractive to job seekers, but it can help limit the amount of taxes you need to pay. If your business pays for fringe benefits for your employees, you can reduce your taxable income.
- Health Benefits
- Long-Term Care Insurance
- Group-Term Life Insurance
- Disability Insurance
- Educational Assistance
- Dependent Care Assistance
- Transportation Benefits
Carefully (Re)Consider Your Business Structure
If you’re a sole proprietor or doing business as a partnership, consider moving into a Limited Liability Company (LLC). Why? This structure offers much more tax flexibility on your business’ income. A business owner of an LLC that elects to be taxed as an S corporation can pay themselves a reasonable wage. This wage is subject to FICA taxes, just like an employee’s salary. However, the remaining business income is not subject to FICA because it passes through as a distribution. This, in turn, helps avoid paying out the self-employment tax on a significant portion of income.
While there are many other ways to reduce your tax obligations, we listed out a few that our team at Hoegen & Associates, P.C. can help you with. If you need assistance with reviewing your tax risks and liabilities, please give us a call at 570-820-3332 to set up a consultation.